The Dynamics of Arbitration: Choosing a Dispute Resolution Provision for Lower-Stakes Deals

However, it is easy to simply accept the dispute resolution provisions in an off-the-shelf template used for a standard arrangement, rather than think through the implications those provisions may have for the deal at hand. This is especially true when the arrangement involves relatively low dollar amounts. Thus, companies often overlook the importance of dispute resolution provisions until they are involved in a dispute and experience the effects of their choices firsthand.

Considering matters such as a preference for litigation or arbitration, any need for expedited or other special treatment, and if arbitration is chosen, the selection of an appropriate arbitration procedure (e.g., American Arbitration Association (AAA), Judicial Arbitration and Mediation Services (JAMS), Delos Dispute Resolution, etc.) can save significant time and costs when a dispute arises. For companies with form supplier, master services, or other vendor contracts, adopting a form agreement that offers alternatives for simpler incorporation at the time of negotiation can encourage the thoughtful selection of provisions that meet the specific size and nature of a deal.

When arbitration is chosen for lower-stakes contracts, the following procedural alternatives are available.

Sole Arbitrator

A single arbitrator, as opposed to a panel of three arbitrators, can significantly reduce costs since the parties pay the arbitrators’ fees, and a sole arbitrator tends to produce a decision more swiftly and cost-efficiently than a panel. For contracts potentially involving more complex legal or factual matters, a three-arbitrator panel may lead to a more thoroughly reasoned result or mitigate against the varied experience and biases of each arbitrator, thus justifying the extra cost. However, for less complex matters, a sole arbitrator can be the more effective choice.

Mediation

Many of the leading arbitration rules include an option to require mediation as a prerequisite for pursuing arbitration. In addition, particularly in relation to disputes related to deal economics (e.g., escrow, milestone, working capital, or revenue-sharing arrangements), parties should consider obligations on the parties to meet and work in good faith to resolve the matter or to involve an independent accounting firm before a party can choose to take the dispute to arbitration. In a majority of cases, mediation resolves the parties’ dispute. Whether mediation is likely to facilitate or prolong resolution of a dispute, thus adding time and expense to the process, can vary depending on the context of a deal.

Expedited

Resolving disputes quickly can help manage business relationships, especially with repeat partners, and allow more certainty in accounting for reserves related to disputes. Parties can agree to use certain expedited procedures offered by arbitration rules or negotiate an individualized compressed arbitration schedule that meets their needs (e.g., limitations on discovery or depositions).

Truncated

Standard arbitration rules grant the parties to a dispute the full range of due process rights under US law. These typically include the right to challenge a choice of arbitrator, to raise claims and defenses in multiple rounds of pleadings, and to participate in in-person hearings. For lower-stakes matters, the parties might streamline procedures by waiving some or all of these rights without incurring undue risk of harm from the truncation of rights.

Matching a dispute resolution provision to the needs of a deal can have a significant payoff in the event of a dispute. Careful consideration of the above factors can be beneficial for a negotiated arrangement, regardless of its nature or scope.

Our lawyers at ArentFox Schiff regularly assist clients on how best to match their dispute settlement needs with the size and nature of a transaction. If you would like further guidance in this area, please contact our Corporate & Securities or International Arbitration & Dispute Resolution teams.